Italy is being forced to pay high interest rates in order to borrow money as the euro zone debt crisis is showing no sign of easing. The borrowing costs rose about 7 percent and the euro tumbled to a 15 month low against the dollar.

By This Is Money Reporter
Last updated at 8:41 AM on 30th December 2011This Is Money

Italy was yesterday forced to pay painfully high interest rates to borrow money as the eurozone debt crisis showed no signs of easing.

Unelected prime minister Mario Monti said the single currency bailout fund needed more firepower after investors demanded a 6.98 per cent yield to buy ten-year government bonds.

Borrowing costs in Rome rose back above 7 per cent on the financial markets immediately after the auction, and the euro tumbled to a 15- month low against the US dollar.

At the same time, borrowing costs in Britain dropped below 2 per cent as investors sought the relative safety of UK government debt.

‘Market movements this year have shown Britain to be a beacon of sanity in Europe,’ said David Miller, a partner at Cheviot Asset Management.

‘We have a stable government with a plan to reduce the deficit, an empowered central bank, and a floating currency. This is not a bad combination for surviving difficult times.’

Italy’s ten-year borrowing costs were lower than the 7.56 per cent demanded at a similar auction last month.

But the yield remained dangerously high at around the 7 per cent zone that triggered bailouts in other eurozone countries.

European leaders had been hoping for a larger fall in the borrowing cost to make Italy’s debt pile of £1.6trillion – or 120 per cent of its GDP – more sustainable.

Kathleen Brooks, research director at Forex.com, said: ‘The timing of the auction was fairly bad for Rome as it’s difficult to see who would want Italian debt on their balance sheet at year-end.

It highlights that the situation in Italy remain precarious.’ The euro fell below $1.29 against the US dollar to its lowest level since September 2010. Monti, whose government was appointed with the approval of Brussels to deal with the debt crisis, said he was ‘ relieved’ by the auctions but added: ‘The financial turbulence absolutely isn’t over.’